Tejon Ranch Co. — Q3 2019 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2019; unaudited. Amounts below are in millions unless stated otherwise. Tejon Ranch is a diversified land development and agribusiness company with commercial/industrial real estate, resort/residential development, mineral resources, farming, and ranch operations.
Financial performance and position
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $9.657 | $15.432 | $29.265 | $33.971 |
| Operating income (loss) | $(2.468) | $2.715 | $(4.895) | $1.911 |
| Net income | $0.037 | $3.487 | $0.870 | $3.929 |
| Net income attributable to common stockholders | $0.047 | $3.488 | $0.873 | $3.948 |
| EPS attributable to common stockholders | Less than $0.01, displayed as — | $0.13 | $0.03 | $0.15 |
- Cash flow: Nine-month operating cash flow was $0.555, versus $8.829 in 2018. Investing used $8.512, and financing provided $1.162. Cash and cash equivalents fell to $9.113 from $15.908 at year-end 2018.
- Liquidity: Cash plus marketable securities totaled $56.536 at September 30, down from $79.657 at December 31, 2018. The company reported $30.0 of unused revolving credit availability at quarter-end; the $5.0 drawn balance was repaid in October 2019.
- Debt and equity: Total debt was $67.919, including the $5.0 revolver, compared with $65.915 at year-end 2018. Total equity was $434.426. Management reported a 13.5% debt-to-total-capitalization ratio and compliance with credit covenants.
- Margins: Operating losses reflected expenses exceeding consolidated revenue. The filing does not present a consolidated gross margin; segment results are discussed below.
Material changes versus the prior comparable periods
- Nine-month revenue decreased 14%, and common-stockholder net income fell to $0.873 from $3.948. In Q3, revenue decreased 37% and common-stockholder income declined to $0.047 from $3.488.
- Farming revenue fell $6.270 for the nine months, chiefly because 2019 was a down-bearing pistachio year and almond sales timing differed. The farming segment recorded a $2.099 operating loss, versus $3.003 operating income in 2018.
- Mineral resources revenue declined $3.635, mainly because water-sale revenue fell by $4.012 amid increased state water allocations following above-average precipitation. The segment’s operating income decreased to $3.345 from $6.586.
- Commercial/industrial revenue increased $5.253 and segment operating income increased $1.285. The comparison includes $4.313 of land-sale revenue associated with a contribution to the TRC-MRC 3 joint venture. The transaction generated $1.533 of recognized profit, with $1.532 deferred.
- Equity earnings from unconsolidated joint ventures rose to $5.046 from $2.411 for the nine months, largely reflecting improved TA/Petro joint-venture earnings. These earnings helped offset weaker farming and water results.
- Other comprehensive loss was $2.722 for the nine months, principally reflecting a $3.888 unrealized loss on the interest-rate swap, net of the reported tax effect.
Outlook, commentary, risks and unusual items
- Outlook: The filing provides no quantified earnings or revenue guidance. Management cautions that results are seasonal and affected by crop yields and sales timing, water conditions, and the timing of real estate sales and leases. It expects adequate cash, securities, operating cash flow and credit availability to fund operations over the next 12 months, but says future development may require additional financing, joint ventures, asset sales, debt or equity issuance.
- Investment plans: Nine-month capital expenditures were $19.195. Planned remainder-of-2019 spending included up to $3.723 for master-planned communities, about $1.765 for TRCC infrastructure and about $0.210 for farming investments.
- Development and entitlement risk: Grapevine approvals were rescinded following litigation; re-entitlement and supplemental environmental analysis were underway, with county action anticipated in late 2019 or early 2020. Centennial received final county entitlement approval in April 2019, but two consolidated lawsuits challenge the approvals. Management said a separate challenge to Mountain Village’s wildlife-plan approval did not impede development; after quarter-end, the court granted dismissal, but plaintiffs filed an amended complaint on October 30, 2019.
- Water and contractual exposure: Estimated future water-payment obligations totaled $250.219, including long-term water supply contracts. The company paid $8.794 for water contracts in the first nine months. Management said it had sufficient water resources for 2019, while identifying California water availability and groundwater regulation as longer-term concerns.
- Other contingencies: Appeals remain in the Antelope Valley groundwater adjudication and consolidated Kern Water Bank litigation. The company also reported a $4.468 standby letter of credit related to East CFD bonds and $71.559 of guarantees on joint-venture debt; management did not expect the guarantees to be called.
- Crop and market risks: Management cited crop-price and yield volatility, tariffs, currency effects, and water availability. Pistachio production was materially lower in the down-bearing year; the company filed an insurance claim for a portion of lost production. Oil production was not expected to increase in 2019 if prices remained at then-current levels.
- Other notable matters: The company amended its term note, extending maturity to June 2029, and increased its revolving credit facility to $35.0 million, extending maturity to October 2024. A swap fixed the amended term note rate at 4.16%. The filing also states that disclosure controls were effective and there were no material changes in internal control over financial reporting.
Important facts for investors to verify
- Whether subsequent crop sales, realized prices and any insurance recovery support the reported farming receivables and reduce the impact of the weak pistachio crop.
- Whether water-sale volumes and pricing recover, and how long-term water-contract costs affect liquidity and development economics.
- Progress, timing, costs and litigation outcomes for Grapevine re-entitlement, Centennial approvals, Mountain Village and the water-related cases.
- Whether TRCC leasing and development, including completion and occupancy of the TRC-MRC 3 building, convert into sustained cash flow and joint-venture distributions.
- Capital funding needs and available sources as development advances, alongside covenant compliance and the company’s substantial contractual water commitments.
- The effect of the interest-rate swap’s valuation changes on accumulated other comprehensive income and the fixed-rate debt economics.